The “flight-to-new projects” – a term used by the office leasing sector to describe the trend of tenants swarming into swanky new office projects – is set to continue next year as companies capitalise on softening rents to upgrade their working spaces.
This merry-go-round, however, is causing pain to landlords of older buildings in the Central Business District (CBD). Based on analysts’ projections, overall prime CBD office rents may fall by up to 10 per cent next year.
But capital values may still hold up amid keen interest for office assets from private capital and the infrequency in office transactions in the tightly held sector.
Said Cushman & Wakefield research director Christine Li: “If the current global macroeconomic and local micro-market dynamics continue to prevail, average office rentals are expected to soften in the short term due to supply pressures with DUO Tower, 5 Shenton Way (UIC Building) and Marina One completing over the next six months or so.”
Overall gross effective rents of CBD Grade-A office are expected to drop by up to 5 per cent next year, after an estimated 8.4 per cent decline to around S$8.50 per square foot (psf) per month this year, Ms Li said.
Savills Singapore is expecting a rental decline of about 10 per cent next year for the CBD Grade-A offices that it tracks, which cover those with multinational tenants and floor plates of at least 10,000 sq ft per floor, after an estimated 5 per cent drop in rents this year to S$8.85 psf per month; CBRE is projecting a 5-10 per cent fall in Grade-A office rents in “CBD Core” in 2017.
Consultancies derive these estimates by tracking a basket of prime CBD offices – each varying from one firm to another. JLL, which tracks investment-grade assets in the CBD, is expecting a smaller 6.6 per cent drop in rents next year as the new supply is gradually absorbed, after a 9.9 per cent fall in 2016.
The office rental index of the Urban Redevelopment Authority (URA) for the Central Region (a wider region that includes fringe areas outside the central area) registered a 6.6 per cent drop over the first three quarters of this year, after a 6.5 per cent drop for the whole of last year. It was 13.2 per cent below the last peak in Q1 2015. Office prices in the same region slipped a smaller 2.2 per cent over the first three quarters this year.
Net take-up of office space in Downtown Core (covers CBD, City Hall, Bugis, and Marina Centre) tracked by the URA during the first three quarters – going by change in occupied space – was nearly 183,000 sq ft, a 69 per cent drop from the year-ago period; the historical average from 2011 to 2015 was around 940,000 sq ft. There is typically a lag from lease commencement to the time tenants move into the new premises.
Savills Singapore research head Alan Cheong believes that annual net take-up of CBD Grade-A office may drop to around 500,000 sq ft in the next five years unless new growth drivers step up fast to fill the gap left by beleaguered industries.
Already, the office leasing market this year has been largely driven by relocations rather than new leases. The former made up 63 per cent of all office leases inked to-date, from 37 per cent last year, based on Cushman & Wakefield’s analysis.
JLL head of research for South-east Asia Chua Yang Liang noted that as pre-leasing activity for the new supply such as Marina One, DUO Tower, and UIC Building started around 2015 and 2016, landlords of existing developments are under pressure to keep existing tenants, let alone attract new ones, and this pressure will persist into 2017.
Guoco Tower, which received temporary occupation permit (TOP) in September, hit 85 per cent in occupancy rate for signed leases and those under advanced negotiations. It is said to be bucking the market trend, with asking rents inching above S$10 psf per month in some cases as the landlord GuocoLand fills up the higher floors.
DUO Tower and Marina One, both developed by M+S, are said to have both reached over 30 per cent in pre-lease commitments for office space, according to brokers.
Among the latest relocation leases, BP is said to be moving to Marina One, where it is taking up 70,000 sq ft and letting go of a similar amount of space at Keppel Bay Tower.
Over at 5 Shenton Way, the former UIC Building has secured serviced office provider JustOffice and Japanese shipping group Mitsui OSK Lines, which are taking 40,000 sq ft and 68,000 sq ft respectively.
Based on Savills’ estimate, from Q4 2016 to 2018, around 926,000 sq ft of CBD Grade-A “secondary space” will be freed up by relocating tenants. Together with the available secondary space of 305,000 sq ft carried over from the previous periods, there will be a total of some 1.23 million sq ft of secondary space to be absorbed.
Close to 3 million sq ft in CBD office gross floor area (GFA) is slated to come onstream next year, after some 2.3 million sq ft of office GFA was completed this year, according to Knight Frank.
The relocation story is expected to continue unfolding next year as the upcoming Frasers Tower at Cecil Street is ramping up interest ahead of its completion in 2018 while Marina One and DUO Tower are still filling up their remaining space, said its head of office Calvin Yeo.
Knight Frank is guiding for a 6-9 per cent rental fall for Grade A and Grade A-plus offices in Raffles Place and Marina Bay office precinct next year, following a 10.5 per cent drop in gross effective rents to S$8.87 psf per month this year.
Most analysts believe that any rebound in office rents will come only in 2018. How soon office rents will turn the corner will depend on when net office demand picks up, said DBS vice-president for group equity research Derek Tan. He is projecting a 5-10 per cent drop in office rents in 2017 as net demand stays flat or marginally positive as companies move from older offices to newer ones.
Maybank Kim Eng analyst Derrick Heng said he sees a 5.6 per cent drop in Grade-A office rents next year on the back of rising vacancies before a slight rebound of 2.4 per cent in 2018. But ample liquidity in the market and keen interest in office buildings should keep capitalisation rates or the rate of return on the property tight.
Capital value estimates for CBD Grade-A office still fall within the S$2,300-2,700 psf range for next year. Judging from the recent enthusiastic bidding of the Central Boulevard “white” site in the government land sale programme and the sale of prime buildings such as Asia Square Tower 1 and 77 Robinson Road, institutional investors are confident of the long term fundamentals in the Singapore office market, Dr Chua said, projecting a 4.3 per cent slide in capital values next year.
According to Mr Tan of DBS, the average 3-3.2 per cent capitalisation rates in office transactions – versus the 3.75-4 per cent used by valuers in deriving capital values for most office landlords – suggests that capital values should remain stable.